March 17, 2010

The binding nature of an “agreement in principle” reached in mediation has made its way to a Massachusetts appellate court. Despite unresolved post-“AIP” issues, the appeals panel upheld the agreement.

The Massachusetts Appeals Court on March 5 held that an AIP reached after a 13-month mediation is a valid enforceable agreement, even though the parties failure to iron out points after the agreement was signed. Targus Group Int’l, Inc. v. Sherman, No. 08-P-113 (Mass. App. March 5, 2010)(slip opinion)(currently available as a slip opinion here, and attached on this page as a text file).

The parties began their business relationship in 2000 when appellee/original plaintiff Targus Group International Inc., an international business supplies manufacturer and retailer, purchased 100% of the stock in Roundhouse Inc., a company founded by the appellants, three top executives in the firm referred to by the court as the Sherman group.

Targus purchased Roundhouse for $79 million and Targus stock. Eventually, the business relationship declined. Targus alleged that the Sherman group had not accurately represented Roundhouse’s financial condition, and the Sherman group countered that Targus also had misrepresented its financial condition.

The parties agreed to mediate in June 2003. Thirteen months later, in July 2004, the parties and their counsel signed an Agreement in Principle, which also was initialed by the mediator, who is not named in the opinion.

The AIP contained seven terms and conditions. The final term requires the “execution and exchange of final settlement documents and mutual releases in a form satisfactory to counsel.”
The two parties sent different drafts of proposed final settlements back and forth, but the Sherman group did not reply to an October 2004 third draft from Targus counsel. Less than a month later, Targus filed suit for specific performance of the AIP in Massachusetts Superior Court.

The trial court concluded that the AIP “was a result of an elaborate process of sophisticated mediation”; that it contained all of the essential terms of a completed agreement; and that the contemplated final proposed documents constituted a memorialization of an already binding agreement.

Based on this reasoning, the Superior Court ruled granted summary judgment to Targus, finding that the Sherman group had violated the AIP and its implied covenant of good faith and fair dealing. The trial court awarded more than $4.1 million in compensatory damages to Targus.

The Massachusetts Appeals Court, in a unanimous opinion written by Associate Justice Mitchell J. Sikora Jr., affirmed the superior court’s decision but reversed on the violation of the implied covenant of good faith and fair dealing.

The court looked at the enforceability of agreements and found that in order to be enforceable, agreements require “(1) terms sufficiently complete and definite, and (2) a present intent of the parties at the time of formation to be bound by those terms.”

The Sherman group had argued that the mediation agreement was titled “in principle,” therefore requiring further documentation to conclude the settlement. Sikora, joined by Associate Justices Gary S. Katzmann and Peter J. Rubin, wrote that there was no reference in the AIP to any unresolved issues; that the agreement does not anticipate further mediation sessions; and that the agreement was signed by both parties and only called for execution of final documents in a form satisfactory to counsel, without mentioning content.

The Sherman Group points out two indefinite terms in the AIP, but the court holds that these terms do not create “serious uncertainty” such as to render the agreement unenforceable.

Finally, the Sherman Group challenges Targus’s intent to be bound by the AIP terms, pointing to Targus’s treatment in post-AIP drafts of some of the AIP’s terms. The court, however, reasons that the intent for these purposes is the parties’ “present intent” at the time of agreement’s formation.

The appellate court looked at the agreement’s text, and held that the parties intended to be bound by the AIP’s terms, and that the agreement modifications and amendments proposed by the parties in subsequent drafts were merely “failed embellishments of the durable core agreement.”

Still, the appeals panel reversed the entry of summary judgment of liability against the Sherman Group upon Targus’s separate claim for breach of the implied covenant of good faith and fair dealing. The court found that there was “a genuine issue of material fact” as to the “mentality of the Sherman group” because the communications provided to the court in the record “were unrevealing about motives and good or bad faith.”